Raphael Restaurant is considering the purchase of a $9,700 soufflé maker. The so
ID: 2652755 • Letter: R
Question
Raphael Restaurant is considering the purchase of a $9,700 soufflé maker. The soufflé maker has an economic life of four years and will be fully depreciated by the straight-line method. The machine will produce 1,850 soufflés per year, with each costing $2.10 to make and priced at $5.10. Assume that the discount rate is 15 percent and the tax rate is 34 percent.
Raphael Restaurant is considering the purchase of a $9,700 soufflé maker. The soufflé maker has an economic life of four years and will be fully depreciated by the straight-line method. The machine will produce 1,850 soufflés per year, with each costing $2.10 to make and priced at $5.10. Assume that the discount rate is 15 percent and the tax rate is 34 percent.
Explanation / Answer
Answer:
Calculation of NPV of the Project
Year
Cash Flows (CF)
PVF (15%)
PV = CF*PVF
Purchase cost of soufflé maker
0
$ (9,700.00)
1.00000
$ (9,700.00)
Tax Saving on depreciation = (9700/4)*34%
1 to 4
$ 824.50
2.85498
$2,353.93
Annual Sales (Net of tax) = (1850 *5.10)*(1-0.34)
1 to 4
$ 6,227.10
2.85498
$17,778.24
Annual Costs (Net of tax) = (1850 *2.10)*(1-0.34)
1 to 4
$ (2,564.10)
2.85498
($7,320.45)
Net Present value (sum of PVs)
$ 3,111.72
Calculation of NPV of the Project
Year
Cash Flows (CF)
PVF (15%)
PV = CF*PVF
Purchase cost of soufflé maker
0
$ (9,700.00)
1.00000
$ (9,700.00)
Tax Saving on depreciation = (9700/4)*34%
1 to 4
$ 824.50
2.85498
$2,353.93
Annual Sales (Net of tax) = (1850 *5.10)*(1-0.34)
1 to 4
$ 6,227.10
2.85498
$17,778.24
Annual Costs (Net of tax) = (1850 *2.10)*(1-0.34)
1 to 4
$ (2,564.10)
2.85498
($7,320.45)
Net Present value (sum of PVs)
$ 3,111.72
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